New Gift Card Rules Make for Happier Holidays

by Judy Dahl

Say someone gave you a gift card for the holidays last year. You put it in your wallet and forgot about it, and then tried to use it this summer. Imagine your shock at being told your $50 card was now worth only $40, because of inactivity fees you didn't even know about. Or maybe you had a card from a previous year that was worthless by the time you tried to use it, because it had expired.

These were common scenarios in past years, but not anymore, due to new rules that took effect in August under the Credit Card Accountability Responsibility Act. The rules significantly restrict gift card expiration dates and fees. They affect retail gift cards, which you only can use at a particular merchant or group of merchants, such as a chain of restaurants. They also affect network-branded gift cards, such as Visa or MasterCard ones, that you can use anywhere the brand is accepted.

Now consumers have protection

"Before the new law went into effect, gift cards were unregulated," says Michelle Jun, a staff attorney at Consumers Union, San Francisco. "Inactivity fees would kick in as early as six months after purchase, and people were subject to expiration dates that happened very quickly.

"It caused a lot of frustration, but now consumers have protection," she continues. "Gift-card issuers can't charge any fees unless the card hasn't been used for 12 consecutive months. After that time, the issuer can charge only one monthly fee. The money on the cards can't expire earlier than five years."

A prepaid card from your credit union can make a great holiday gift.

Reloadable gift card balances can't expire until five years from the last time you reloaded them. If your card itself expires, but the balance doesn't, the card issuer must give you a replacement card at no charge. You should be able to find out how to get a replacement card on the back of the one you have now. Any expiration date and fee information has to be disclosed on the back of the card or on its packaging.

The new rules apply only to gift cards, not to other types of prepaid cards. For example, general-purpose reloadable prepaid cards intended as checking account substitutes aren't covered. Rewards cards and rebate cards also are not covered.

Looking out for consumers

Federal legislators wanted to simplify things for consumers in passing the gift card law, notes Heather Morton, a legislative analyst for the National Conference of State Legislatures, Denver. "Consumers were concerned, with so many fees and early expiration dates tacked on, that they weren't getting full value for their gift cards in relation to what they paid for them," she explains. "State legislatures had been looking at the issue for years, and different states had enacted restrictions on expiration dates and fees."

In fact, 40 states have gift card laws on the books, and the laws differ from state to state. "Federal law looked at what the states were doing and used it to come up with standard rules, recognizing that many gift card issuers operate across state lines," says Morton.

"Before the new law went into effect, gift cards were unregulated."

The federal law creates a floor, or minimum standard set of rules for gift cards, that issuers have to follow. "If a state legislature feels the federal law doesn't do enough, it can enact more stringent restrictions," Morton says. "But right now, most are occupied with ensuring their state laws are in compliance with the federal law."

Many gift card issuers had produced cards that include now-incorrect disclosures before the new law took effect. The regulations allow them to use up that inventory of cards by the end of 2010. During the transition period, gift card issuers can disclose the new rules through signs, Web sites, customer service numbers, and advertising.

But if you're giving a gift card for the holidays and the disclosure is incorrect, be sure to inform the recipient of the new rules. "Consumers have the new protections already, but they may not know it because the disclosure on the card is wrong," says Jun.

Compare cards and use them promptly

It's still important to compare cards before you buy. "Most issued directly by retailers don't have any expiration dates or upfront fees, so they may work best," says Jun. Many network-branded gift cards do charge fees.

"If you get a gift card, use it as soon as possible."

Some consumer groups believe the new rules don't go far enough. There's no cap to the monthly fee amounts. And while the rules reduce what the industry calls "breakage"—unused gift card balances—through longer expiration dates, unused balances still will bring huge revenues to gift card issuers. Breakage can happen through lost or expired cards, or if people receive cards they don't want, or if the unused balance is so low the consumer doesn't bother with it.

The Tower Group, Needham, Mass., estimates that the highest breakage rate reached 10% of all gift cards purchased in 2007. In 2008, retailer bankruptcies at organizations such as Sharper Image and Linens 'n Things compromised $100 million in gift card values. In 2009, consumers lost $5 billion—which went to the gift card issuers—through breakage.

And there's speculation that gift card issuers might increase upfront fees on their cards to replace the income they used to get from card expirations and inactivity fees. "We still advise, if you get a gift card, use it as soon as possible," says Jun.

"Often people forget about them, and it's still possible for them to expire," she adds. "Or with cards directly from retailers, the retailer might go bankrupt and the consumer may not be able to recoup the value. It's the worst thing to get a gift and it's worthless."